Introduction and the Framework


Two phases of costs to generate an internally generated intangible



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Two phases of costs to generate an internally generated intangible:

  • Two phases of costs to generate an internally generated intangible:
  • Research phase – original and planned investigation to gain new scientific or technical knowledge: costs are expensed as incurred
  • Development phase – application of knowledge to a plan or design for the production of new materials, devices, products, processes, systems or services before commercial production: costs are expensed as incurred, UNLESS

Development costs are expensed as incurred unless all of the following can be demonstrated. If so, can capitalize as an intangible asset.

  • IAS 38 Internally Generated Intangibles
  • Development costs are expensed as incurred unless all of the following can be demonstrated. If so, can capitalize as an intangible asset.
  • Technical feasibility of completing
  • Intention to complete, use or sell
  • Ability to use or sell
  • How it will generate future economic benefits
  • Availability of resources to complete and use or sell, and
  • Expenditures during development can be reliably measured, i.e., feasibility and economic viability of the asset must be established to support capitalization

The following cannot be internally developed intangible assets because the costs of these cannot be distinguished from those to develop a business in general:

  • IAS 38 Internally Generated Intangibles
  • The following cannot be internally developed intangible assets because the costs of these cannot be distinguished from those to develop a business in general:
  • Internally generated brands
  • Mastheads
  • Publishing titles
  • Customer lists
  • Others, similar in nature to these

Cost of an internally generated intangible asset:

  • IAS 38 Internally Generated Intangibles
  • Cost of an internally generated intangible asset:
  • Costs directly associated with making the asset ready for use in the manner intended by management. Examples: materials and services consumed, payroll costs, depreciation, amortization costs to generate the asset, legal fees to register
  • **No costs can be retroactively capitalized

In the past, a number of costs were recognized as prepaid or deferred and treated as intangibles. IAS 38 indicates: if no intangible asset is acquired that can be recognized, then expense the cost

  • IAS 38 Internally Generated Intangibles
  • In the past, a number of costs were recognized as prepaid or deferred and treated as intangibles. IAS 38 indicates: if no intangible asset is acquired that can be recognized, then expense the cost
  • For services, recognize as an expense when service is received
  • For goods, recognize when entity has the right to access the goods supplied

A prepaid asset is recognized instead of an expense only when the payment for goods and services is made before the goods are available to the entity or services have been performed

  • IAS 38 – Internally Generated Intangibles
  • A prepaid asset is recognized instead of an expense only when the payment for goods and services is made before the goods are available to the entity or services have been performed
  • Apply in all situations, e.g., pre-opening and pre-operating costs, training costs, advertising and promotional costs, relocation costs

Example:

  • IAS 38 – Internally Generated Intangibles
  • Example:
  • Ace Co. recognizes an account payable to a supplier for producing and delivering a mail-order catalog to be used over the following 12 months. What do you debit?
  • Debit an expense. The catalog does not meet the definition of an intangible asset, inventory or a prepaid expense.

Choice: cost model (CM) or revaluation model (RM)

  • Choice: cost model (CM) or revaluation model (RM)
  • Decision is made for each class of intangible assets so all in same class use the same model

Cost model

  • IAS 38 – Measurement after Recognition
  • Cost model
  • Most widely used
  • Asset is carried at cost less accumulated amortization and accumulated impairment losses

Revaluation model

  • IAS 38 – Measurement after Recognition
  • Revaluation model
  • Asset is carried at its fair value at the date of the revaluation less any subsequent accumulated amortization and accumulated impairment losses
  • Cannot use retroactively to recognize intangible assets not previously recognized
  • Applied the same as for property, plant and equipment assets

RM – key aspects

  • IAS 38 – Measurement after Recognition
  • RM – key aspects
  • When revalued, carrying amount adjusted either by adjusting asset and accumulated amortization proportionately or eliminating the accumulated amortization and bringing the asset to its revalued amount
  • Increase in carrying amount: credit to OCI and into revaluation surplus account; unless offset to previous loss charged to P&L when the increase can offset a prior loss.


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